Using Climate Revenues and Allowances for the Right Purpose

The series of hearings on climate change before the Senate Energy and Natural Resources Committee continued on Wednesday, with a panel examining climate policy options. Panelists spoke about cap-and-trade regimes, carbon taxes, performance standards, sectoral approaches, and research and development as potential ways to reduce emissions. While Chairman Bingaman noted that emission-reduction policies are not necessarily mutually exclusive, a lot of attention was paid to the differences between carbon taxes and cap-and-trade programs during the hearing.

The panelists agreed that revenues are raised in both cap-and-trade and carbon tax regimes. But not all uses of revenues are equal. While Dr. Ted Gayer suggested that tax revenues raised be used to offset payroll taxes or for deficit reduction, such a plan ignores the real world consequences of implementing climate policy. A comprehensive climate policy will need to transform our economy, support development and deployment of clean energy technologies, modernize infrastructure, assist consumers, help the nation adapt to the impacts of climate change, and support international climate efforts – and all of these things will require significant resources. Using a carbon tax to send revenues to the Treasury for general use or to Congress for unrelated earmarking is not the way to ensure resources are dedicated to these purposes.

A responsible cap-and-trade program has the ability to direct a portion of allowance value (either directly by allocating allowances or indirectly by use of auction revenue) to a variety of economic, infrastructure, consumer, and adaptation needs. The legislative process has the ability to tailor assistance sectorally or geographically in a way that would be far more difficult to accomplish in tax policy. This redirection of revenues eases the transition to a clean energy economy and makes climate legislation more practically feasible and politically viable.

As Senator Byrd stated this week, the transition to a clean energy economy will not necessarily be easy, but it is one that is unavoidable. Congress needs to pass cap-and-trade legislation that makes the transition as smooth as possible.